Consumer spending, business reports point to moderate recovery

Consumer spending rose 0.7 percent in October, and businesses started adding inventory after 10 months of lowering their stockpiles, according to reports Wednesday. Some see recovery at a moderate pace.

ByRon Scherer, Staff writerNovember 25, 2009

New York — A spate of economic statistics released on Wednesday, ranging from consumer spending to business inventory, is helping economists get a better picture of the economic recovery.

What they see is an economy that is leaving the recession behind, but at only a moderate pace. The recovery is not quite fast enough to make many Americans feel good, but the economy is growing enough so it should start to create some jobs.

“I think we can say the worst of the recession is over,” says John Canally, economist at LPL Financial in Boston. “But it’s only a modest recovery from a severe downturn.”

Unless consumers go wild at the malls in the next few weeks, economists such as Mr. Canally expect the economy to grow at close to a 3 percent rate in the last quarter of the year, after growing at a 2.8 percent rate in the third quarter.

Here are some of the signs Wednesday that the economy is moving in a positive direction:

• Jobs. For the week that ended Nov. 21, initial claims for unemployment fell by 35,000 to 466,000, the Labor Department reported. If the trend were to continue, it would indicate a major turnaround in the labor market.

But economists caution about getting too excited. “I’m not sure if this is a one-week wonder,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “You need to see some confirmation that it was just not something odd.”

On Dec. 4, more news will come out about jobs when the Labor Department releases the unemployment report for November. The consensus is that the rate will remain at close to 10.2 percent and that the economy will have shed 125,000 jobs, an improvement over recent months.

• Consumers. Consumer spending rose 0.7 percent in October after falling 0.6 percent in September, the Commerce Department reported Wednesday. But almost a third of the increase was due to auto sales, spurred by the cash-for-clunkers program, points out economist Nigel Gault of IHS Global Insight in Lexington, Mass. With wages flat, Mr. Gault worries about where consumers will get their spending power.

Consumers are wondering about their future as well. A Reuters/University of Michigan survey of consumers, released on Wednesday, showed a decline in confidence in November. People are still worried about their jobs and finances, Gault says.

• Businesses. Orders for durable goods fell 0.6 percent in October after rising 1.8 percent in September, the Commerce Department reported Wednesday. Although that headline number was weak, the report also showed that businesses started adding inventory after 10 months of lowering their stockpiles, Canally says. “That restocking will help job growth; it will help boost GDP in the quarter,” he says.

However, economist Daniel Meckstroth of the Manufacturers Alliance/MAPI is not impressed. The industry, he says, is beset with overcapacity and declining activity in commercial construction. Any pickup is the result of government stimulus and inventory swings, he says. “The industrial recovery will likely be relatively slow and punctuated by fits of growth and decline,” he writes in an analysis.

It appears that business is less than optimistic about the future. The October report for orders of core, nondefense capital goods showed a decline of 2.9 percent – “a troubling development,” says Gault, given the substantial piles of cash held by companies.

• Housing. This sector is finally showing some signs of life. Sales of new homes in October rose 6.2 percent, according to the Commerce Department on Wednesday. This was better than expected, says Gault. He believes that the home-buyer credit, which was due to expire on Nov. 3 (but has been renewed by Congress), had something to do with the rise.

It's important, Gault notes, that the supply of new homes on the market fell to 6.7 months – down from 10-plus-month levels at the beginning of the year.

“That eventually means builders will start to build new homes,” he says. “But we’re not there yet.”